While the fintech sector has been one of Britain’s biggest success stories in recent years, investment has largely been reserved for venture capital and private equity.
Augmentum has long heralded itself as the only way retail investors can gain exposure to UK fintechs.
Since going public in 2018, it has enjoyed healthy demand from savers looking to invest their money in groundbreaking startups. But now a volatile macroeconomic environment has dampened interest in such higher risk investments.
We speak with fund manager Tim Levene about how he’s managed to weather the tech sell-off and why he thinks a weak IPO market isn’t the end of the world.
Fund manager Tim Levene says Augmentum’s share price is struggling as retail investors turn away from growth and focus on value
Tech sell-off was ‘random’
Very few asset classes have escaped the volatility of the past 18 months, but technology has been particularly hard hit.
Big hitters like Meta, Google owner Alphabet and Netflix have all seen their share prices tumble between 30 and 70 percent.
Investors have turned their attention to value stocks, particularly banks and oil companies, as inflation soars and central banks raise interest rates.
Augmentum has not been immune to defeat. Despite NAV holding steady at 155p in the six months to March, Augmentum’s share price performance has been choppy.
It is currently trading at 103p, having hit a high of 173p last year, and is trading at a 33.23 percent discount to NAV.
Levene says he is “frustrated” by the price volatility given the portfolio’s underlying growth, a view also expressed by chairman Neil England in the fund’s recent results.
“It’s very difficult for us, we can’t control the share price, we can only control what we can control. If you have a stock with a smaller market cap, you seem to be a bit more volatile,” says Levene.
“I think I’m frustrated with the share price because I think it’s been unfairly maligned when you look at the underlying performance, I think we need to demonstrate that we deserve to be rated premium.
I think we need to demonstrate that we deserve a premium rating. Hopefully we can do better than we did this year
“Hopefully we can do better than we did this year to demonstrate that to investors.”
Most of the volatility in Augmentum’s share price — which is down 35 percent so far — can be attributed to retail investors turning to value stocks, Levene says, while institutional flows have remained largely stable.
“I recognize that over the past 12 months, investors have left growth behind and are looking for more stable, yield-enhancing stocks and are looking for value, I get that. I think the sell-off across the tech sector has been pretty random.”
But he suggests that the technical defeat may have a silver lining, prompting DIYers to take a closer look at what’s under the hood of these companies.
“I think the research will be much better and more detailed on the underlying performance than we saw maybe 18 months ago.”
Strong underlying growth despite revaluation
Augmentum already stands out from the crowd by being the UK’s only listed fintech fund, but its stability over the past six months has been impressive.
While the share price has certainly been volatile, the net asset value per share has held up – down just 0.1 percent, or 2 pence, from March.
Technology has been particularly hard hit by market volatility over the past 18 months. Big names like Meta, Google owner Alphabet and Netflix have all seen their share prices plummet
“A stable NAV in the current environment is pretty good. That’s not because we do nothing and sit on our hands, there is growth,’ says Levene.
It had to be cautious in some ways and the fund stopped its deals when the market was ‘buzzling’ and prices were too high.
In March, Augmentum valued its top 10 holdings at 5.7 times their expected earnings, which fell to 4.2 times in September, which it says compares favorably to high-growth publicly traded fintech peers.
“If you look at the results and look at the underlying growth… if we had applied the same valuation methodology and used the same multiples that we used six months ago, we could have written more than 20 percent.
“You couldn’t take the blow [in the selloff] if you don’t take the benefits along the way. I think we’re comfortable with the way we’ve applied the valuation method.
“Looking at our top 10 portfolio companies, which account for about 70 percent of NAV, they’ve averaged 100 percent year-over-year growth this year, which is pretty good. Growth is still strong across the board, which is encouraging.”
Long-term holdings Zopa and Tide performed particularly well as they quietly built up market share.
Zopa, which started out as a peer-to-peer lender before getting a full banking license in 2020, now has more than 800,000 customers and became cash-generating for the first time this year.
Despite headwinds for SMEs, small business bank Tide has managed to increase its market share to eight percent.
“I’m sure they could grow even faster in a thriving economic environment. But still 60-65 percent year-on-year revenue growth? I find it really encouraging,” says Levene.
“Fundamentally, why are they growing? Because the big banking platforms cannot effectively serve these small customers. They don’t have the effective digital solutions that these agile companies are looking for.’
Why a Calm IPO Market Isn’t Bad News
One of Augmentum’s main selling points is that it offers retail investors exposure to privately held fintechs, which is increasingly important given the subdued IPO market.
The London Stock Exchange raised £565.5 million from eight IPOs in the third quarter of this year, seven times less than a record £4 billion from 33 IPOs in the same period last year.
Augmentum’s top 10 positions
Levene seems unimpressed by the bleak prospects for IPO exits.
“I wouldn’t say there’s an IPO market, I don’t think it exists. If you look at the past five years and add up every fintech exit, 96 percent have been through M&A, not IPOs.”
Augmentum has been the beneficiary of abrdn’s £1.5bn takeover of broker Interactive Investor this year, retaining most of the £42.8m it raised from the deal.
As much as people like to refer to the IP market, when it comes to fintech exits, it’s really just one small part of the overall puzzle.
“I’m not overly obsessed with the return of the IPO market… I think it’s important for retail investors to get exposure, but that makes our proposition even more attractive to investors.
“They simply cannot gain exposure to these assets in the public market because they rarely come to market…because the vast majority are bought before they go public.
“Even those who do go public do so much later, so investors miss out completely. From our point of view, it really highlights our unique nature. There are no other listed fintech funds in the UK… that can offer investors diversified exposure to fintech in particular.
“You just have to make sure there are enough winners in the portfolio…”
A bet on crypto?
Levene is proud to have taken a prudent approach this year – the fund remains selective, investing only 0.1 percent of assessed opportunities.
But he won’t miss the opportunity to invest in emerging technology, not least crypto. Augmentum has invested seven percent of its portfolio in digital assets, including Gemini, the crypto exchange run by the Winklevoss brothers.
“We’re not going to give investors exposure to tokens, directly or indirectly, that’s just not what we’re about.
“But I think it would be pretty stupid if certain, new aspects of blockchain digital assets go mainstream in the next few years, have some very compelling use cases and we don’t have any exposure to them.”
The fund has also invested in cryptocurrency lender Tesseract and protocol and liquidity provider Parafi.
The recent FTX scandal has shown Levene the importance of investing in platforms like Gemini, which he says are “well positioned, alongside Coinbase, by being one of the most credible platforms.”
“I think the most important thing to note about FTX was that it had nothing to do with crypto or digital assets per se, but dereliction of duty and control associated with running that business.”
Levene revealed that he had met disgraced FTX boss Sam Bankman-Fried, who had been seeking capital in previous rounds.
“He’s very engaging and charming in a very academic way. From our point of view, we felt there were question marks about their approach to regulation, which has been proven. It was an interesting set of interactions, but it just wasn’t a good fit for us.”
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